Even The Eternal Optimists Now See A Global Recession

Major multilateral financial institutions and central banks have the worst forecasting track records in the financial world. The Federal Reserve, ECB, and the IMF are among the worst, but other government-backed institutions aren’t much better. There are reasons for this.

Governments will never admit a recession is coming even when it’s staring them in the face. That may be good politics, but it’s lousy economics.

It’s also the case that these institutions are populated with Ph.D. economists who are stuck in the past with flawed models and can’t get things right even if they wanted. The World Bank is perhaps slightly better than the rest. That’s why their updated global economic forecast is such a big deal.

The World Bank just made a huge downward revision to its 2023 growth forecast. They have cut their global growth estimate to 1.7% from a prior projection of 3.0% growth. They also say this would be “the third weakest pace of growth in nearly three decades.” The only comparable periods were the outright declines of the 2008 global financial crisis and the 2020 pandemic panic.

This forecast is a big deal for several reasons. The first is that global slowdowns are rare. It’s not unusual for a slowdown or even recession to occur in a single country or economic region such as the EU. When that occurs, there’s usually another country or group doing better that can prop up global figures even as one region suffers. (This is sometimes called the “locomotive theory” in the sense that one strong country can pull the weaker countries forward or help pull them out of the ditch).

The second reason is that the World Bank generally leans toward optimistic forecasts and is among the last to issue warnings of this type. This new downbeat forecast may be due in part to the fact that David Malpass, head of the World Bank today, is a conservative Republican with a good reputation and is not one to cook the books.

In any case, this is a forecast that should be given some weight. My own forecast is for a recession in the first half of 2023, perhaps a severe one. The World Bank sees growth, but the fact that they are so close to the line of actual contraction lends weight to my more dire view.

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